La Cible

Mai 2022

La Cible, magazine officiel de l’IQPF, est destinée aux planificateurs financiers et leur permet d’obtenir des unités de formation continue (UFC). Chaque numéro aborde une étude de cas touchant les différents domaines de la planification financière.

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34 lacible | Mai 2022 FEATURE ARTICLE CAN DEFERRING GOVERNMENT PENSIONS EASE THE EFFECT OF INFLATION? The consumer price index (CPI) rose by 4.8% 1 in 2021, and this inflationary trend does not seem to be running out of steam. In January 2022, the annual increase in the CPI was 5.1%, the biggest jump since September 1991. It's still unclear whether this is a one-off spike or a deep-set trend. That said, unsurprisingly, current data are sowing fears for many people, especially seniors and retirees. A group that may be at greater risk Seniors and retirees often have less control over their income in retirement. While workers can sometimes negotiate their salaries, change jobs to improve their working conditions or work more hours, many of these options are not possible for retirees. So they are often more deeply affected by rising inflation. Retirees who draw their income from indexed sources, such as the members of generous defined- benefit (DB) pension plans, may not see too much impact from a burst of inflation. We should bear in mind, however, that many DB plans do not index benefits or only index them partially. That is the case of the RREGOP, for example. When inflation rises, retirees who are drawing a significant portion of their retirement income from their savings (RRSPs, TFSAs, accumulation plans, etc.) have to withdraw more than usual to maintain the same purchasing power. The outcome of this decision may be to shorten the "lifespan" of these savings. Government plan benefits Although the benefits from the main government plans – namely, the Québec Pension Plan (QPP) and Old Age Security (OAS) – are basically indexed to inflation, the way the increase in these benefits Martin Dupras ASA, F.Pl., M. Fisc., ASC, IQPF Fellow Founding President ConFor financiers inc. is calculated may result in a short-term difference between the posted CPI increase and the increase in these benefits. 2 Other than these potential differences, though, these plans offer protection against inflation and, more specifically, protection against increases in inflation. Deferral of government pensions In recent years, many analyses have demonstrated that deferring benefits from government plans can often be quite profitable. Let's take a look at a fictional case study: • Claude is 60 and no longer working. • The reasonable disbursement period, based on the IQPF and FP Canada Projection Assumption Guidelines, would be 34 years for a man and 36 years for a woman; we are using 35 years. • Claude has been contributing to the QPP for 40 years, with salaries always exceeding MPE. • Only the QPP basic plan will be used, ignoring the enhancement that has applied since 2019. • We will consider the OAS enhancement at age 75. • Claude has $310,000 in RRSPs and no other assets. • The inflation rate for expenses and income is 2%. • The annual growth in MPE and maximum QPP retirement pension is 3%. • Claude's return net of fees is 4%. • Indexed income: We are aiming for the highest indexed gross income that can be maintained to age 95. The first graph shows the disbursement of assets assuming that Claude decides to claim government benefits as soon as possible, namely, QPP at age 60 and OAS at age 65. The RRSP/RRIF assets will allow Claude to maintain a gross income, indexed annually at 2%, of $28,200 for the entire period projected. 1 Source: Table 18-10-0004-01 2 See the article by Salomon Gamache in this edition of La Cible.

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